In these Investment Research Notes I am taking a quick look at Blackmores Ltd (BKL) as a potential investment.
By running a company through the below research notes model it helps me to update my knowledge on a company and decide whether it is worth placing (or removing) a company on my Watchlist, taking the time to complete a full Checklist and then possibly making an investment for one of my Portfolios.
My Strategies: Great Companies, Cyclical Companies and Asset Plays
During my research and screening processes I look for three different styles of potential share market investment opportunities:
- Great companies at a fair to discounted price compared to my valuation.
- Solid cyclical companies at a discounted price compared to my valuation.
- Asset Plays: Companies trading at a large discount to their net tangible assets, that also have a little something extra.
This is my order of preference, with great companies at the top of my list, cyclical companies second and asset plays third. The reason for this is a great company should keep churning out large profits well into the future, a cyclical company as the name suggests will require you to keep an eye on the cycle and price more closely, and an asset play will be an investment you usually sell within 1-5 years once the market has realised it’s value or not.
My Goal: Greater than 15% (preferably 20%)
All three of my above strategies are based on a value investing framework and my goal is the same for each: ‘To produce long term compounding annual returns over 15% (preferably 20%).’
For this to happen I need to ensure three things:
- The companies I invest in need to return over 15 / 20% p/a.
- I need to ensure the company can more than likely perform this way for the long-term at as low of a risk as possible.
- I need to purchase my shares at less than fair value to ensure my investment returns are over 15 / 20% and allow for a margin of safety / error.
My Methods: Price vs Value
Great Companies: Durable competitive advantage & price
When looking to invest in Great Companies for the longer term there are only two things I believe I really need to know in order to make a sound investment decision.
- Does the company have a durable competitive advantage?
- Is the company available at a fair to cheap price?
Cyclical Companies: Durable competitive advantage & price
When looking to invest in Cyclical Companies there are only two things I believe I really need to know in order to make a sound investment decision.
- Does the company have a solid balance sheet, a solid income stream and some sort of slight advantage over competitors?
- Is the company available at a cyclically cheap price?
When looking to invest in Asset Plays there are three things I believe I really need to know in order to make a sound investment decision.
- What are the companies current and future Assets & Liabilities?
- Is the company currently making any income? If not is there potential and what is the timeframe?
- Is there some likely potential or upside on the horizon?
Conclusions: How I will use the results
As mentioned above the below research notes will help me to decide whether it is worth placing (or removing) a company on my Watchlist, taking the time to complete a full Checklist and then possibly making an investment for one of my Portfolios.
- If the company appears to have a durable competitive advantage I will place it on my Watchlist and then run it through a full Checklist.
- If the company appears to have a durable competitive advantage and appears to be available at a fair to cheap price I will place it on my Watchlist, run it through a full Checklist and then possibly make an investment for one of my Portfolios.
Introduction: Blackmores (BKL)
“Blackmores is Australia’s leading natural health company. Founded by visionary naturopath Maurice Blackmore in 1932, Blackmores combines traditional naturopathic expertise with scientific research to help people achieve optimal health and wellbeing. Committed to developing innovative natural health products and services of the highest quality, Blackmores reaches consumers in 15 countries.” – From the Blackmores 2016 Annual Report.
Method used: ‘Great Company’
Blackmores falls into my ‘Great Company’ model, so what I am looking for here is a durable competitive advantage and a fair to cheap price.
Durable Competitive Advantage
Does Blackmores (BKL) have a Durable Competitive Advantage?
To determine whether a company has a durable competitive advantage I address the below questions:
Can I identify Blackmores durable competitive advantage?
YES. As far as I can tell Blackmores’ durable competitive advantage is ‘trust.’ They have dedicate a lot of their time and resources to research and over the years and this has built a certain amount of trust with customers. They work hard to protect this trust, but trust is easily lost – so I would want to allow a further discount in any buy price to allow for this.
Does Blackmores have consistent long term earnings growth?
YES. My calculations show that Blackmores have delivered an average annual compounding earnings per share grow rate of 21.16%.
Relevance of Earnings: Consistent earnings per share growth shows me that a company not only has a solid revenue stream, but also has it’s expenses under control. If a company can consistently manage both revenue and expenses over the long term this indicates to me the company has some form of competitive advantage.Data from commsec
Does Blackmores have consistent long-term return on equity (ROE) over 15%
YES. My calculations show that Blackmores have delivered an average annual return on equity (ROE) of 33.14%.
Relevance of ROE: A consistent long term average ROE over 10-12% shows me that a company has managed share holders capital efficiently by deploying it wisely into a business with some form of competitive advantage that provides consistent above average returns.Data from commsec
Does Blackmores have consistent long-term return on capital (ROC) over 15%
YES. My calculations show that Blackmores have delivered an average annual return on equity (ROC) of 23%.
Relevance of ROC: A consistent long term average ROC over 10-12% shows me that a company has managed share holders capital efficiently by deploying it wisely into a business with some form of competitive advantage that provides consistent above average returns without using excessive levels of debt.Data from commsec
Does Blackmores have consistently high profit margins?
YES. Blackmores have historically delivered operating margins consistently over 12%.
Relevance of Margins: Consistent long term average margins over 10-12% show me that a company has some sort of advantage of it’s competitors that allows them to charge a premium for their products or services. This needs to be judged based on a comparison with the industry the company operates in.Data from commsec
Does Blackmores have a consistently low to medium level of debt?
YES. And no. Not consistently low, but latest figures show that Blackmores debt sits at 30.7% of equity.
Relevance of Debt: Maintaining low to medium levels of debt and prioritising paying debt down quickly (if more than usual has been used for a reasonable purchase or acquisition) shows me that a company is not too foolhardy and quick to put investors capital at risk, whilst still using some debt to maximise returns and grow the business. 30% or less debt I am comfortable. 50% debt or less I am watching. Up to 100% it has to be a great company with really solid cash flow and reason for the debt. Over 100% I am more often than not going to walk away from the investment.Data from commsec
Is Blackmores (BKL) available at a fair to cheap price?
Is Blackmores share price currently struggling from a market panic, industry downturn or reversible business mistake?
YES. Blackmores is currently down % from their most recent high.
Relevance of a struggling share price: In my experience most great investments are made when a business that can survive a downturn is purchased during a market panic, industry downturn or reversible business mistake. Not all struggling share prices are great opportunities, but there are many great opportunities to be found in struggling share prices.Data from google finance
Is Blackmores current PE Ratio under it’s long-term average PE Ratio?
NO. But it is close, Blackmores is currently trading at a PE Ratio slightly above the long term average.
Relevance of PE Ratio: In my experience the market sometimes over prices a stock and other times under prices a stock. A crude way to measure this is by comparing the current PE Ratio with the long-term average annual PE Ratios to determine roughly how under or over priced a stock may be.Data from commsec
Is Blackmores long-term earnings per share growth higher than the long-term share holders return?
NO. My calculations show Blackmores Shareholder Compound Annual Growth Rate (CAGR) is slightly above the Earnings CAGR.
Relevance of Earnings vs Return: In my experience the earnings CAGR of a company and the shareholder CAGR of a company usually run in parallel over the long-term. In the past I have previously found underpriced investments by comparing the long-term earning CAGR and the long-term shareholders CAGR. All else equal, if earnings CAGR is higher than shareholders CAGR the stock may be underpriced and vice versa.Data from commsec
With a 10 year shareholders CAGR of 21.83% Blackmores appears to be a great company and is currently down from it’s recent highs. However, it still does not look cheap just yet.
Next Step: More research or Give it a miss?
Blackmores has passed my first research hurdles, next step is to run it through a full Checklist to look further into:
- Risks to the earnings stream.
- Potential competitive threats.
- Size of the potential market.
- Strength of the Brand.
- Management incentives.
- Major Shareholders.
- A potential buy price range.
If Blackmores can pass these tests and then trades at my buy price I may start adding it to one of my Portfolios.
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Enjoy the ride!